Cybercurrency is intriguing premise, but has seen a flurry of recent devaluation

I've recently heard a couple of advertisements on satellite radio suggesting, of all things, that customers dive into bitcoins as a "stable" investment in the midst of the troubled U.S. economy. In the midst of a seemingly impending recession, some might be tempted to try such a scheme. Let's be perfectly clear -- while bitcoins are a worthy pursuit to dabble in, considering them as a place to put your nest egg is a pretty poor decision.

I. Bitcoins are in a Recession Themselves

After a meteoric rise to prices of up to $30 USD/bitcoin at their peak, the crypto-currency has plunged down to around $8 USD. This alone should be enough to convince any logical investor to stay away. But it's also important to consider the currency's strong current connection to the USD.

Over the last 30 days 82,099.28€ (Euros), $133,353.44 CAD (Canadian dollars), £119,336.29 (British pounds), and 607,234.53 PLN (Polish zloty) in Bitcoin have been traded on international exchanges. At current rates, that's approximately $659K USD in volume. By contrast, the top four USD-based exchanges managed $14.521M USD in trades, or roughly 22 times as much volume.

With approximately 95 percent of trades being in USD, the fortune of the USD intimately affects the fortune of the bitcoin.

When you combine the aspects that bitcoins are tied to the fate of the U.S. economy and that they've been on a downward plunge even sharper than the U.S. economy, the outlook is not pretty for bitcoins as a serious investment bid. Even amid the stock market's huge losses (with today's $300+ USD decline, the New York Stock Exchange is at its lowest level since December 2010), bitcoins are still not a solid alternative to guaranteed securities like treasury bonds, or a diverse portfolio.

II. Bitcoin Mining is in the Midst of a Correction

Another issue with bitcoin looms on the mining end. Bitcoin is trying to condense the natural creation of a non-commodity currency to just a couple decades, so it relies on initial seeding of wealth (similar to how people laid claim to natural resource stakes, which in turn gave rise to non-commodity wealth).

But the seeding is hitting a roadblock, as it's no longer advantageous to mine. With difficulty soaring, it's now impossible for most video cards to break even. The fastest graphics cards by Advanced Micro Devices, Inc. (AMD) still stand a chance to break even, but they require more than a year of work.

Meanwhile, the difficulty continues to rise at an unforgiving pace.

For those who already have money sunk into bitcoin hardware, they may keep mining for a time, but it may be unsurprising if they start to sell off their stockpiled hardware.

In the long term the market will thus correct itself as, in theory, computation gains will outpace the rate of mining. However, now is simply not a great time to enter the market as a miner.

III. The Big Picture

Returning to the original point, given the current climate bitcoins are not a much safer investment than stocks, as some purport them to be. They're actually much worse, at present.

Until these corrections fall into place, the currency is simply not a viable investment.

Fans of bitcoin may react negatively to this analysis, but it's hard to argue the hard facts. Bitcoin is a terrific concept, and one worth supporting. But when it comes to your money, an investment in bitcoins today, is essentially throwing away a chunk of your money, or perhaps breaking even in the case of mining (given hardware depreciation).

So as the U.S. faces a potential "double dip" recession, consider building a diverse portfolio of bonds, commodities, and stock from highly stable companies (GOOG, AAPL, IBM, etc.) as a way to guard your assets -- and avoid the bitcoins.

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Umm...you do know that gold holds intrinsic value right? Fiat money is intrinsically useless (maybe you can use it for rolling more doobies because you are smoking something if you think gold will lose all value). So me and my gold will be each have a nice Beefy-T when you are lying in a pile of useless money on a park bench somewhere.

Will those of us with gold be millionaires (well probably after serious inflation lol...but you know what I mean)? No. But it is called a hedge. Like insurance. If you want something safe don't expect to make money off of it. Have you ever made money off of car/homeowners insurance? That is what hedging in gold is like. Though incidentally people who got into gold early ARE actually rolling in fiat currencies right now. Those who get in it now will merely be protecting themselves from total loss.

Also as mentioned, you could invest in stocks as a way to safeguard yourself. But which ones will be safe can be tricky when you are making an assumption that the US dollar and/or economy will be tanking. And I'm not saying that you have to believe that it will tank, but you'd have to if you are taking such defensive precautions.

Not to mention if you invested in gold at the height of the last "gold bubble" you would've actually DOUBLED your investment by now (albeit in fiat US currency). 1979:~$800 NOW:~$1700

But you certainly wouldn't be broke. And that is the point.It is not people trying to get rich off of tech stocks in the 90s or people trying to get the house of their dreams in the 00s. People investing in gold want safety.

it's not a mistake. it's called inflation and it's always a poor decision to investment at the top of a market. the buying power of $800 in 1979 = the buying power $2500 in 2011. So if you make an $800 investment in 1979, you better get more than $2500 out of it if you sell in 2011, or you are loosing money.

in your example, buying it at the peak of the gold market in 1979 is such a poor idea, that the original investment won't even keep up with inflation as it is only worth $1700 today, only 68% of it's original value. In contract if you had invested $800 in Exxon in 1979, it would be worth $143,000 today and doesn't even count dividends. Does gold pay you dividends? Nope.

lol I see where I was mistaken there. The value (in USD) did not double.

You are correct except that I am not trying to make money in this instance. Yes, I know loss is a possibility. As I said...

quote: But you certainly wouldn't be broke. And that is the point. It is not people trying to get rich off of tech stocks in the 90s or people trying to get the house of their dreams in the 00s. People investing in gold want safety.

The cost would not be $2500. It would be $2500-$1700(the value of the gold that you can cash out now)=$800. If I had $800 in '79 bought gold and it is now worthless then that would be a loss of $2500. The current value of the gold needs to be in the calculation.

On the other hand this does not include the opportunity cost of not investing in something like Exxon (or maybe even BTC ;-) But these options do not provide safety. At least with gold you end up with $1700 today. But investing in Pan Am (or maybe even BTC ;-) could leave you with nothing.

And also we are talking about buying gold at the worst possible time. Because as you said, it is unwise to buy high. But in this case you STILL end up with money in the bank.But then again, in this scenario, we might be selling at the BEST possible time too. Five years ago the cost would be greater.But as part of a long-term strategy there is nothing wrong with buying the gold at the height of a bubble and selling at the height of a bubble. With the uncertainty going on right now, I wouldn't doubt gold climbing up to $2500. As we have pointed out...It essentially happened in 1979.

So I certainly won't be buying at that price ;-)

I'm not sure if you think I believe people should put everything into gold or not, so let me clarify that I agree with Wu Tang Financial because you should definitely diversify. I'm only addressing the merits of gold as an investment.

Now I'm not sure if I misunderstood your initial comment or not but I thought you were saying that you would lose $2500. But I think we are now in agreement here on the numbers, though we may disagree on investment strategy. Please excuse my mistakes, I do get it wrong in these comments sometimes.